SIPPs and divorce – some useful scenarios you may encounter

You recently read about some the key areas for advisers to consider when a client is getting divorced and how a SIPP can be dealt with.

There are several things an adviser can do to help make the process of ensuring a Pension Sharing Order (PSO) is dealt with as smoothly as possible, for both the client and the ex-spouse.

A key consideration will be the make-up of the SIPP that the PSO applies to, notably the investments that the SIPP being split is invested in.

If the SIPP is all in cash, then the process is more straightforward. If the SIPP has a more illiquid asset within it and it makes up most of the SIPP’s value, actioning the PSO will be more problematic.

To help you understand how your divorcing clients could be affected, read on for several useful scenarios that explain how a PSO could work in practice, based on splitting different investments held within a SIPP.

The more straightforward scenario

A client notifies his adviser that he is in the process of getting divorced. This client has a SIPP made up by collectives on the adviser’s preferred platform valued at £200,000 and cash held in the trustee bank account valued at £100,000. The client is in full drawdown and is taking a regular income.

There are a few areas for the adviser to consider here:

• Until the PSO is received, the value of the SIPP due to the ex-spouse will not be confirmed. However, the adviser can still prepare. For example, they may consider liquidating some of the positions in the investment portfolio with a view of having to make a payment to the ex-spouse.
• Is the adviser going to continue to act for the ex-spouse? If so, the adviser needs to decide how the ex-spouse is going to receive their share of the pension and which provider will look after this. Copies of ID for the ex-spouse will also be required.
• If the ex-spouse is going to appoint a new adviser, it may be beneficial for the existing adviser to contact them to ensure the smooth process of actioning the PSO. In IPM’s experience most delays in paying PSOs occur when the ex-spouse does not have an arrangement in place to receive their share of the pension split.

In this instance, the ex-spouse decides to remain with their existing adviser and the client’s SIPP provider. This makes arranging the pension split more straightforward as the split can be carried out in-house.

The SIPP provider receives the PSO, and it states that 50% of the client’s SIPP value should be paid to the ex-spouse. The ex-spouse elects to receive this in cash.

In anticipation of the PSO coming in on a 50/50 split, and with the client’s ongoing income requirements in mind, the adviser had already liquidated £60,000 of the investment portfolio at a time when the investments were performing well.

This then allows the SIPP provider to take a £150,000 pension debit from the client’s trustee bank account and pay this to the ex-spouse’s trustee bank account as a pension credit.

The SIPP provider then provides statements to both parties confirming what has taken place, completing the PSO.

A point to note here is that the client was in full drawdown. This means that the pension credit received by the ex-spouse cannot be used to pay a pension commencement lump sum (PCLS), however income can be paid once a test against the Lifetime Allowance (LTA) has taken place.

Where investments are involved

A client who has multiple investments within their SIPP is getting divorced. The SIPP holds £200,000 worth of assets on a platform, £100,000 in a trustee investment bond, £100,000 in an execution-only broker account, and a residual amount in cash.

When the PSO comes in, it awards the ex-spouse 40% of the client’s SIPP. In this instance, that is £160,000. The ex-spouse has appointed a new financial adviser they would like to work with and has already decided to transfer to an alternative pension provider.

The adviser acting for the client contacts the ex-spouse’s new adviser to discuss the PSO and how the ex-spouse would like to proceed. The new adviser indicates that the ex-spouse would like to receive assets to the value of £160,000 from the client’s platform account.

While this is something that the SIPP provider can consider, to allow for any fluctuation of the value of investments the advisers agree that £159,000 worth of investments are paid as a pension credit in-specie to the ex-spouse’s new pension with the balance to be made up by cash transfer.

The client’s SIPP provider issues an instruction to the platform holding the assets to make the in-specie switch and requests a statement when this is done showing the value of the assets transferred.

Once received, the SIPP provider then pays the balance up to £160,000 and the PSO is complete. The SIPP provider writes to both the client and ex-spouse to confirm what has taken place.

Where a commercial property is held

A PSO is not so straightforward where clients hold a commercial property. Ultimately, the next steps will come down to the percentage of the PSO due to the ex-spouse and the value of the property within the SIPP being split:

• Consider a SIPP valued at £300,000, with £100,000 being the property and £200,000 being investments managed on a platform by an adviser. The PSO comes in on a 50/50 split. Here, it would be more straightforward for the pension credit to be paid from liquidating sufficient assets from the portfolio.
• Consider an alternative scenario where the SIPP is worth £300,000 and £225,000 of this is the value of the commercial property, with £75,000 in a portfolio of investments. The PSO is on a 50/50 basis. Here, this can lead to complications and further considerations.

It is the second scenario we are going to look at further.

At all times the SIPP provider would encourage the client, their ex-spouse, and their appointed advisers to ascertain exactly how the pension credit should be paid, especially in situations like this. We want to avoid a situation where the SIPP provider is forced into action to satisfy the court order!

When the percentage of the pension to be split has a property worth more than the value of liquid assets available to make the pension credit, there are three options to look at.

Option 1 – split property between client and ex-spouse within a Group SIPP

This option sees the ex-spouse receiving a percentage ownership of the property within a SIPP, being held in a group arrangement with the client. This will not give the client or ex-spouse the clean break they may wish for.

Depending on how the relationship broke down, this may not be the favoured choice!

Using the figures above, the ex-spouse is due £150,000 of the client’s SIPP as a pension credit. The SIPP provider will need to obtain a valuation on the property from a RICS surveyor to suitably value the property for PSO purposes.

Then, it will be down to the client and ex-spouse to decide how they wish to split the SIPP. Will the client offer all £75,000 of investments and £75,000 of the property, or will they agree on the ex-spouse receiving the pension credit entirely as property?

If we take the assumption that the pension credit will consist of £75,000 investments and £75,000 worth of the property, the SIPP provider will establish a SIPP for the ex-spouse with a platform account in, so as it is able to accept a transfer in-specie of assets from the client’s SIPP.

The SIPP provider will then set up a group arrangement into which the property will be held. Going forward, the client’s SIPP will hold 66.66% of the group arrangement while the ex-spouse’s SIPP will hold 33.33%. This 33.33% together with the transfer in-specie of platform investments will satisfy the PSO.

Rent coming in for use of the property will first go into the group arrangement before filtering down to individual SIPPs on the same percentage split for further investment. Going forward there may be instances where both individuals will need to come together to discuss matters relating to the property, for example should the property be vacant or if one of them wishes to sell it.

Option 2 – raise liquidity to settle PSO

In most instances, the clean break of the PSO will appeal to both parties, so the option above would be one they are keen to avoid. However, to make the pension credit, the SIPP would need to have sufficient liquidity.

In the scenario we are considering, the property value takes a greater percentage of the SIPP than there are liquid investments. Where the property in the SIPP is unencumbered, one thing to consider would be to take out a mortgage to generate the liquidity the SIPP needs to satisfy the PSO.

A SIPP can borrow up to 50% of net scheme assets. So, in this instance, the SIPP can borrow up to £150,000. As borrowing does not have to be linked to a property purchase, the key thing for the SIPP provider to understand is why the borrowing is being drawn. They also need to ensure that there is sufficient rental income being received to make ongoing mortgage payments.

This SIPP has £75,000 of liquid investments, so another £75,000 of liquidity needs to be generated to make the pension credit and keep the property in the SIPP for the benefit of the client.

Once the client has sourced the loan, the SIPP provider liaises with the bank completing the loan deeds. On the day the loan is drawn, the SIPP provider will test the value of the SIPP to ensure the borrowing does not exceed the 50% limit (which it does not in this instance) and receives the money into the trustee bank account.

This along with the liquid investments on the platform can be used to settle the pension credit to the ex-spouse.

Option 3 – sell the property!

This is often the most unpopular and undesirable of outcomes. However, if the individuals cannot come to an arrangement as to how the SIPP can be split, this may well be the only option.

Get in touch

If you are working with a client who is divorcing, and you’d like assistance with wither splitting an IPM SIPP or creating a new SIPP to accept a pension credit, please get in touch.

Email info@ipm-pensions.co.uk or call 01438 747151.